15.2 Static And Flexible Budget Variance

Question 1

A major disadvantage of a static budget is that

A. It is more difficult to develop than a flexible budget
B. It is made for only one level of activity
C. Variances tend to be smaller than when flexible budgeting is used.
D. Variances are more difficult to compute than when flexible budgeting is used

Answer 1

B. It is made for only one level of activity

Static budgets are prepared based on the best estimates for output to be produced and costs to be incurred before the period begins. If there are any variations in conditions actually experienced, the static budget is unhelpful for diagnosing specific problem areas since it only reflects one level of activity.

Question 2

When preparing a performance report for a cost center using flexible budgeting techniques, the planned cost column should be based on the

A. Budgeted amount in the original budget prepared before the beginning of the year.
B. Actual amount for the same period in the preceding year.
C. Budget adjusted to the actual level of activity for the period being reported.
D. Budget adjusted to the planned level of activity for the period being reported.

Answer 2

C. Budget adjusted to the actual level of activity for the period being reported.

If a report is to be used for performance evaluation, the planned cost column should be based on the actual level of activity for the period. The ability to adjust amounts for varying activity levels is the primary advantage of flexible budgeting.